Fin 571 Week 5 Problem Set
A. Bixton’s objective is to achieve a credit standing that falls, in the words of the chief financial officer, “comfortably within the ‘A’ range.” What target range would you recommend for each of the three credit measures?
To remain within the 'A' range the following is recommended
Fixed Charge Coverage 3.00–4.30
Funds From Operations/Total Debt 45%–65%
Long-Term Debt/Capitalization 22%-32%
So to be comfortably within the range A the company should try to maintain higher fixed coverage ratio (near to 4.3), higher Fund from operation/total debt ratio (near to 65%) and maintain a lower long-term debt to capitalization ratio (near to 22%).
B. Before settling on these target ranges, what other factors should Bixton’s chief financial officer consider?
Bixton CFO should take following into consideration
- Company ability to fully use non-interest tax credits (foreign tax credits)
- Issuance cost related to Debt and future fixed expense in form of interest payment irrespective of the level of income
- Company ability to raise debt from the market.
- Effect on Brand image or goodwill of the company on raising debt
C. Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation, what key issues specific to Bixton must the chief financial officer resolve?
Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation the CFO of Bixton Corporation should consider the existing amount of R&D expenditure and foreign Tax credit. It is possible company may not be able to fully utilize the additional tax saving generated by taking additional debt when R&D expenditure and foreign tax credit is taken into consideration.
Chap 18, Prob A10
D1 = ADJ [POR(EPS1) – D0] + D0
D1 = 0.75 [0.25 x $8.00 - $1.00] + $1.00 = $1.75
D2 = 0.75 [0.25 x $8.00 - $1.75] + $1.75 = $1.94
D3 = 0.75 [0.25 x $8.00 - $1.94] + $1.94 = $1.985
D4 = 0.75 [0.25 x